I could not get my mind around this deal. Why would a sovereign fund invest in CitiGroup? Why catch a falling knife? There had to be something else going on, and I kept wondering. So I did my research on the Internet attempting to get all of the possible perspectives out of this deal. I have a picture now, and one article sums things up nicely.
First the lead in:
Citigroup is selling up to 4.9 percent of itself for $7.5 billion (3.6 billion pounds) to the Gulf Arab emirate of Abu Dhabi, giving the largest U.S. bank fresh capital as it wrestles with the subprime mortgage crisis and the resignation of its chief executive.
All sounds good, yes?
The capital injection will shore up Citi’s balance sheet, which has been hurt by some $6.8 billion of writedowns and losses in the third quarter, and the potential for another $11 billion in the fourth quarter.
Huh? So the past write downs are just covered, but not the future "potential." oookkkk….
Analysts at Royal Bank of Scotland said in a note that Citigroup was paying a "high price," but that the convertible notes would help boost the bank’s core capital.
The sale to the $650 billion Abu Dhabi Investment Authority, the world’s largest sovereign wealth fund, may also signal the freefall in U.S financial stocks is close to ending, analysts said.
Wishful thinking to call a bottom?
What concerns me is the following:
The securities will also pay a fixed coupon of 11 percent per year, payable quarterly. That may seem steep, but after accounting for the fact that 60 percent of that coupon is tax-deductible, the coupon rate is similar to the dividend rate on Citi’s shares, a person familiar with the matter said.
Think about how this deal is being structured. Citi will water down the shares with another 5% of shares, meaning current shareholders are getting the short end of the stick. On top of that Citi is selling shares at an extremely cheap price that could cost it in the long term. But to add injury to insult they will pay an 11% premium. This is almost 2% points above junk bond levels. I don’t see this as a good deal for Citi and it tells me that things are pretty bad at Citi.
So where are American’s getting duped? Read the last reference to the article again. The 11% fixed coupon is tax deductible meaning that the American tax payer is making the Abu Dhabi wealth fund richer. It is not bad enough that Abu Dhabi gets the benefit of expensive oil and gas, but now they get money from a coupon to pay for the mismanagement of an American corporation. To rub salt into the wound it looks like CitiGroup might have some sizable layoffs.